The first asset with absolute, mathematical scarcity is bitcoin. Any network user can confirm this scarcity, which is controlled by a mechanism written into the Bitcoin source code. This algorithm enables miners to obtain newly created bitcoin when they produce blocks. The high costs of mining are covered by this subsidy for the miners. However, the algorithm divides the subsidy in half every four years, a process known as halving. Until about the year 2140, this process will continue, and the flow of new bitcoin will decrease from one satoshi every block to zero.
Revenue from miners is roughly slashed in half when a halving happens. In any sector, a 50% decline in revenue might result in the closure of a company. In the case of Bitcoin, mining directly contributes to network security, putting the security model at risk if miners leave the network. Bitcoin doubters think that low miner revenue could result in decreased security and a declining value proposition for Bitcoin itself as the block subsidy moves closer to zero.
A deflationary currency has been feared by skeptics as well. Some economists have asserted that there will not be enough Bitcoin on which to construct a monetary system and that Bitcoin would never enable retail payments due to its high price as its inflation rate steadily declines.
This post will go into great detail on both of these issues.
Security issues with networks
Hash rate provides a rough estimation of the security of the Bitcoin blockchain at any one time by measuring the total amount of mining taking place on the network. Block subsidies are decreasing, which threatens both the revenue that miners receive and what would appear to be the security of Bitcoin. But despite a halving, a number of factors combine to let miners keep mining profitably and maintain Bitcoin security.
First of all, the block subsidy—the freshly created bitcoin—plus the total transaction fees paid in a block make up miner income. It is known as the block reward. The block reward decreases by less than half as a result of the block subsidy being reduced in half while transaction costs remaining same.
The demand for transactions on the network will increase as Bitcoin use increases over time, and fees are anticipated to increase to partially recoup mining costs. This is due to the fact that every ten minutes, only a specific amount of transactions can be validated. Transactors must therefore bid in order to get their transactions validated quickly.
Second, the advancements in Bitcoin mining technology are phenomenal. Since their launch around 2013, ASICs—the specialized microchips that miners employ to mine as effectively as possible—have experienced remarkable advancements. An additional amount of the money lost due to the halving can be made up for if a miner can improve energy efficiency while cutting costs.
Appreciation of Value
Last but not least, an increase in Bitcoin’s value can convert a loss in revenue in Bitcoin into a gain in revenue in currency. The great majority of miners still pay their costs in fiat money, hence they are more focused on their revenue in fiat than their revenue in bitcoin. Therefore, a miner can tolerate a 50% decrease in the block subsidy without losing any money in fiat terms, even if the price of Bitcoin doubles over a four-year period.
This final element is particularly important because price increases for Bitcoin are fueled by halvings. The simple laws of supply and demand state that the price should increase because the halving decreases the amount of new bitcoin that enters the market. In fact, over the first 12 years of Bitcoin’s existence, this theory has come to pass. Between the three prior halvings, the price of bitcoin in U.S. dollars climbed by at least 900 percent, more than making up for the 50% decline in bitcoin-denominated revenue for miners.
So, the demand in an economy would not be destroyed by Bitcoin. Instead, it will change consumer demand from current commodities to future goods. The deflationary pressure brought on by Bitcoin may have a negative influence on some companies that sell disposable, short-lived goods, but it would benefit others, like the tech industry. In fact, for the past 30 years, the tech industry has faced significant deflationary pressure. While the quality, variety, and utility of these technologies have expanded, the cost of televisions, phones, and laptops has remained constant or decreased. Despite this deflation, shoppers all around the world have kept on making bigger and bigger purchases of gadgets.